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Choosing a Trading Time Frame

Choosing a trading time frame can be tricky. There are a lot of factors to consider. Do you stick with the standards, 1 min, 5 min, 10 min, 15 min, 30 min, 60 min, 1 day, 1 week? Do you improvise, 50 min, 100 min? What determines the time frame in which you will trade? The key to choosing a time frame to trade in is that you must choose a time frame that suits your personality as well as your trading strategy.

Time Frames

As we look at different trading time frames ranging from 1 minute to 1 day, or 1 week, the technical signals we see forming on our trading charts range from less to more reliable. That is to say, as the trading time frame gets bigger, the more reliable a trading signal will be.

For example, an MACD divergence on a 1 day chart is more reliable that an MACD divergence on a 60 minute chart. An MACD divergence on a 60 minute chart is more reliable that an MACD divergence on a 10 minute chart. An MACD divergence on a 10 minute chart is more reliable that an MACD divergence on a 1 minute chart.

I'm quite sure there are all sorts of theories as to why this is, in fact, I'm quite sure there are lots of people who wouldn't buy into this idea at all. Never the less, it's what I believe and it's how I trade. Which means, I'm going to tell you about it.

I believe that the shorter time frame signals are less reliable than longer ones because of scope and purpose of trading. On longer time frames, daily or more, people or institutions trade with purpose. They place trades and buy and sell contracts because they foresee longer term shifts in price or because of industrial or commercial needs. This has the effect of creating smoother and more fluent price action.

There is also the question of volume. If 1 million people are telling you something, do you think it would be more reliable than if 350 erratic people are telling you something? Lets look at fast trading time frames, 1 minute. In this case, people are placing trades to scalp.

Some people are placing trades for long term goals or reasons but those orders could appear to be "all over the place" on a 1 minute chart, when in fact they are in a very narrow range relative to a daily chart. 1 and 5 minute price charts do form signals, sometimes, but the frequency of beneficial follow through is nowhere near reliable.

The fastest chart I bother with is 10 minutes, and only then to break down my specific entry and exits relating to my 60 minute chart analysis and interpretation.

Liquidity and Value

Another factor that diminishes as the time frame gets smaller is liquidity. Liquidity and slippage can be a killer if you're trying to act on signals in 1 and 5 minute price charts. How are you going to execute and entry or exit accurately or predictably if a mere order of "10 at the market" will wipe out your entire profit expectancy?

Another, hopefully obvious, flaw of ultra-short time frames like 1 and 5 minute charts, is that the moves that do come from signals aren't that big. They might look big because they move across the entire screen, but they really just amount to a few piddley points. The point is, is that your profit expectancy is reduced significantly while your costs remain the same. It's simply not reasonable for your average from-home-trader to profit from such small moves with costs that don't shrink proportionally.

Boredom

An incredibly important element to trading success is the time in between trades. You might ask, "Why does it matter? Isn't good method and money management what makes good traders?".

The answer to those questions is yes method and management are crucial, but the time in between trades matters because it determines whether or not you get bored. We're all human, we all get bored. What happens when we get bored? We get stupid.

Yes, trades made on longer time frames might be more profitable, more reasonable, and more sound, but what will happen when you spend two and a half months without making a trade? You might start looking for trades that you really shouldn't be making.

This may not be true for everyone. In fact, I bet there are lots of robots out there who trade exactly that way, with maximum patience. I am not one of them, and I bet there are lots more like me out there.

One of the reasons I am so attracted to trading, is because it provides me the ability to not be employed. I hate employment because I get bored. What can I do to remedy this situation? Find a trading time frame that fits in with my tolerance for boredom. I know I can go about two weeks without making a trade before a start "seeing trades that aren't really there".

On a daily chart trading time frame, trading a single market, there is too much in between time and I get bored. I might as well trade drunk. So what do I do, I find a charting time frame that allows me to identify reasonable trades every 2 to 5 days. My trades usually last anywhere from one hour to 36 hours.

The trading time frame that is most compatible with my personality style and trading strategy turned out to be 60 minutes. I tried 100 minute charts, and I tried 30 minute charts, but they either "didn't feel right" or my strategy wasn't coming through properly. By careful self observation and retroflection, you can determine which trading time frame suits your personality and then adjust it to conform to the trading strategy that you like, the one that seems to be working for you.

If you're reading this, chances are you've read a million and a half trading strategies that are floating around out there. Pick one, master it, put it in a time frame that is compatible with your personality style so that self defeating boredom doesn't get the better of you.

Find Balance

With all that being said about trading to avoid boredom, don't be fooled. Never trade for excitement. However, I will restate my previous point in different words. Just because you're not trading "for fun", it doesn't meant that trading can't be fun.

Again, you can achieve a "fun level" and satisfaction by finding a trading time frame that is "fun" for you. If you do, you learn to love what you do by staying busy, being eager about learning, and applying your knowledge with patience and care.

Take me for example, I like to trade on a 60 minute time frame. I usually find a trade between every 2 to 5 days. We all know a lot of futures trade pretty much around the clock. Does this mean I'm sitting in front of the computer for 72 hours straight waiting for a trade, and then another 24 hours while the trade runs its course? Hell no! I am vigilant, and I can see when a trading opportunity may be coming up and approximately when it might materialize. I plan, and set aside that time to "pay attention". In the mean time, during those 36, 72, and 96 hour time periods in between I do other things. I read about trading. I learn about new markets. I work on this website. I exercise, I cook, I sleep, I go fishing, I live a balanced life and come back to trade. Well, it would be a little more balanced if I had a girlfriend. Maybe by the time you read this I will ;) ;) ;)

Last Thoughts

Find a trading time frame that suits your personality style. Make sure it also suits your trading strategy. For example, I like to trade MACD divergences. I have found that this trading strategy works very well (for me) on the British Pound against US dollar (GBP/USD) futures on a daily time frame.

However, I have found it problematic on the 60 minute time frame for this futures contract. Inversely, I have found that trading MACD divergences on the 60 minute time frame works very well (for me) on the Canadian dollar against US dollar (CAD/USD) futures, but not so well on the daily charts for that particular future.

Be sure to test out your trading strategy on different products (eg: currencies, energy, grains, whatever) and also in different time frames until you find matches that are suitable to you and your personality as well as your trading strategy.